The high-profile startup had signed several questionable insurance deals on Conrad’s watch, reports said.

Zenefits CEO Parker Conrad has abruptly resigned amid allegations that his company failed to comply with insurance industry regulations. Conrad founded the startup–which operates a free technology platform that helps companies manage their human resources functions and find affordable insurance–in 2013, and it has grown rapidly.

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Parker Conrad

Several reports since November have alleged that Zenefits allowed its sales reps to act as insurance brokers, selling insurance policies to consumers in seven states without a broker’s license. Zenefits management was either unaware of the problem, or failed to act quickly to correct it, the reports said.

Zenefits COO David Sacks, who was once CEO of enterprise messaging company Yammer, will step in as CEO.

By now all of you have heard the news that Parker has resigned as CEO. I know that this will come as a shock. Parker was not only the founder of this company but also its driving force until this day. I know it will take time for people to absorb and process this news, and it will raise many questions about the company.

I believe that Zenefits has a great future ahead, but only if we do the right things. We sell insurance in a highly regulated industry. In order to do that, we must be properly licensed. For us, compliance is like oxygen. Without it, we die. The fact is that many of our internal processes, controls, and actions around compliance have been inadequate, and some decisions have just been plain wrong. As a result, Parker has resigned.

In order for us to move forward as a company, we cannot seek to hide or downplay the problem. We must admit it and remediate it as soon as possible. In December, we hired a Big Four auditing firm to conduct an independent third-party review of our licensing procedures that we will turn over to regulators as soon as possible. I will expand that effort into a top-to-bottom review to ensure appropriate and best-in-class corporate governance, compliance and accountability.

I am also appointing Josh Stein as our Chief Compliance Officer. I know that he will bring the same rigor to this job as his did in his previous experience as a federal prosecutor. Josh is already in communication with regulators to advise and update them of our compliance issues.

These steps are a start to fixing the problem, but they are not enough. We must admit that the problem goes much deeper than just process. Our culture and tone have been inappropriate for a highly regulated company. Zenefits’ company values were forged at a time when the emphasis was on discovering a new market, and the company did that brilliantly. Now we have moved into a new phase of delivering at scale and needing to win the trust of customers, regulators, and other stakeholders.

Sacks goes on to explain that Zenefits has tried to address too much of the insurance market at once, and that it will now focus on servicing small businesses.

The startup took a massive $500 million round of venture capital last year. One bright spot in today’s news is that venture capital rock star (and PayPal cofounder) Peter Thiel will be joining the Zenefits board of directors.

When Sacks said in his letter that compliance was like oxygen, he could have been talking not just about Zenefits but a whole array of startups with ambitions to shake up highly regulated industries.

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In November 2013 the Food and Drug Administration sent genetic testing company 23andMe a public warning letter demanding that it cease marketing genetic testing kits for health problems. The government claimed that the company “failed to obtain marketing clearance or approval to assure their tests were accurate, reliable and clinically meaningful.”

More recently, the lab-testing company Theranos last October found itself at the center of controversy when two Wall Street Journal reports raised questions about the accuracy of the startup’s blood tests. In October the FDA said that Theranos’s Edison device was an “Uncleared Medical Device” and ordered the company to stop using it for all but one of its 200 tests.